Wednesday, August 29, 2012

Home prices in 20 U.S. cities climbed in June for the first time since a tax credit boosted sales in 2010, indicating the industry at the heart of the worst recession in the post-World War II era is starting to rebound.

The S&P/Case-Shiller index increased 0.5 percent from June 2011 after falling 0.7 percent in the year to May, a report from the group showed today in New York.
The last 12-month increase took place in September 2010. Nationally,
prices jumped last quarter by the most in more than six years.

The lowest mortgage rates
on record and a decline in sales of distressed properties may help the
market contribute to the economic expansion that is now in its fourth
year. A more sustained rebound may require easier lending conditions,
which would also give consumers a lift after a report today showed
household confidence sank to the lowest level of the year.

“Finally,
the housing market is forming a bottom,” Mohamed El-Erian, chief
executive officer and co-chief investment officer of Pacific Investment
Management Co., said on Bloomberg Television’s “In the Loop” with Betty Liu. “That should be welcome. It is not surprising because affordability is so attractive right now.”

Stocks were little changed as investors weighed the economic reports ahead of Federal Reserve Chairman Ben S. Bernanke’s
speech on the economy in three days. The Standard & Poor’s 500
Index fell less than 0.1 percent to 1,409.3 at the 4 p.m. close in New
York.

Housing Overseas

Overseas, housing markets aren’t faring as well. Sales of newly built homes in Australia dropped in July to the second- lowest level on record, a report today showed.

In Europe, figures today showed Spain’s
recession worsened in the second quarter as the government’s austerity
measures to reduce the euro area’s third-biggest budget deficit and a
slump in consumer spending offset growth in exports.

The
S&P/Case-Shiller 20-City index was projected to drop 0.05 percent
in the year to June, according to the median forecast of 29 economists
surveyed by Bloomberg. Estimates ranged from declines of 1.5 percent to a
1 percent gain. The index is based on a three-month average, which
means the June data were influenced by transactions in April and May.
Year- over-year records began in 2001.

In an effort to boost home
sales, lawmakers gave first-time homebuyers a tax credit worth up to
$8,000 as part of the 2009 stimulus package. The break expired April 30,
2010, indicating the recent gains in sales are sustainable.

More Gains

“This
ain’t tax credit driven,” said Thomas Lawler, a former Fannie Mae
economist who is now a Virginia-based housing consultant. “There are
fundamental reasons to expect home prices have bottomed and will
continue to show gains.”

Consumer confidence
fell in August as households grew more pessimistic about their
employment prospects and the economic outlook, another report today
showed. The Conference Board’s index
decreased to 60.6, the lowest level since November, from a revised 65.4
in July, according to data from the New York-based private research
group. The 4.8-point decrease was the biggest since October. The reading
was less than the most-pessimistic forecast in a Bloomberg survey in
which the median projection was 66.

Susan Wachter, professor of real estate and finance at the University of Pennsylvania’s
Wharton School, said the increase in prices will help aid consumer
confidence, in turn benefiting other parts of the economy.

‘Real’ Rebound

“This is real,” Wachter said. “The market has turned and barring any new shocks, this should continue.”

Today’s
home price figures also included quarterly national data. Property
values in all the U.S. increased 1.2 percent in the second quarter from
the same time in 2011 compared with a 1.4 percent drop in the year ended
March. They jumped 6.9 percent from the previous three months before
seasonal adjustment. The gauge increased 2.2 percent after taking those changes into account, the best performance since the fourth quarter of 2005.

Home
prices in the 20 cities adjusted for seasonal variations increased 0.9
percent in June from the prior month. Unadjusted prices climbed 2.3
percent from the previous month.

The year-over-year gauge provides better indications of trends in prices, the group has said. The panel includes Karl Case and Robert Shiller, the economists who created the index.

Broad Pickup

“The whole market in the process of a pickup -- it’s the little engine that could,” Case told Tom Keene and Ken Prewitt on Bloomberg Radio today. “It’s chugging along at a reasonable rate.”

Thirteen
of the 20 cities in the index showed a year-over- year gain, led by a
14 percent increase in Phoenix. Atlanta had the biggest year-over-year
drop, with prices falling 12 percent.

The swing in property
values from a decline last year to a gain in 2012 will provide
“meaningful support” to economic growth as rising home prices boost
household wealth, economists at UBS Securities LLC wrote in an Aug. 24
research note. The improvement may boost consumer spending by as much as
0.5 percentage point at an annual rate, helping the world’s largest
economy expand by 2.1 percent this year and 2.3 percent in 2013, they
wrote.

Toll Brothers Inc. (TOL),
the largest U.S. luxury-home builder, reported a better-than-estimated
profit and an increase in revenue for its third quarter ended July 31.
The average price of the homes that the Horsham, Pennsylvania-based
company delivered in the quarter climbed to $576,000 from $557,000 in
the previous three months.

‘Pent-Up Demand’

“The housing recovery is being driven by pent-up demand, very low interest rates
and attractively priced homes,” Chief Executive Officer Douglas Yearley
Jr. said on an Aug. 22 conference call with investors. “With an
industry wide shortage of inventory in many markets, we are enjoying
some pricing power.”

Recent reports also indicate a pickup in demand. Purchases of new homes rose more than projected in July to match a two- year
high, Commerce Department data showed last week. Previously-owned house
sales rebounded from an eight-month low, the National Association of
Realtors reported.

Prices are improving in part because
distressed homes are making up a smaller portion of sales. Distressed
sales accounted for 24 percent of existing-home purchases in July, the
Realtors data showed. That’s less than the prior month and down from 29
percent in July 2011. Such sales are comprised of foreclosures and short
sales, in which the lender agrees to a transaction for less than the
balance of the mortgage.

Fewer Foreclosures

There were 58,000 foreclosures in July, down from 69,000 a year earlier, CoreLogic Inc. said in a report today.

“The
decline in completed foreclosures is yet another positive signal that
the housing market is continuing on a progressive path of stabilization
and recovery,” Anand Nallathambi, president and chief executive officer
of Santa Ana,
California-based CoreLogic said in a statement. “Alternative
resolutions are helping to reduce foreclosures and often result in a
more positive transition for the borrower and lower losses for investors
and lenders.”

The views,
opinions, positions or strategies expressed by the authors and those providing
comments or external internet links are theirs alone, and do not
necessarily reflect the views, opinions, positions or strategies of First
Capital, we make no representations as to accuracy, completeness, current,
suitability, or validity of this information and will not be liable for
any errors, omissions, or delays in this information or any losses, injuries,
or damages arising from its display or use. Any information
provided does not constitute an offer or a solicitation to lend. Providing
information to purchase does not guarantee a loan approval. All registered trademarks, copyright,
images, or other items used are property of their respective owner and are used
for editorial purposes only.

First
Capital Mortgage is a subsidiary of PHH Home Loans LLC, a direct lender, Dept.
of Corporations file #413-0713 NMLS#4256

Tuesday, August 28, 2012

By most measures, the housing market’s recovery has been slow. But private-market “jumbo” mortgages—larger, higher-cost home loans that aren’t guaranteed by the federal government—are making a much faster comeback.

Private-market jumbo loans accounted for about 15% of the total dollar amount of mortgages distributed by Bank of America Corp. (US:BAC) -1.10%during the second quarter of 2012, up from 4% a year earlier, says a spokesman for the bank.

At Wells Fargo & Co., (US:WFC) -0.06%private jumbo volume more than doubled in the first half of the year from the same period last year, according to Brad Blackwell, portfolio business manager for the bank’s home-mortgage unit.

In all, lenders doled out $38 billion in private jumbo mortgages during the second quarter of 2012, up 65% from a year earlier, according to new data compiled by Inside Mortgage Finance, a trade publication. That is the highest quarterly dollar amount since the first quarter of 2008.

“This is a real positive for the entire marketplace, and hopefully this is the first sign that credit markets will open up,” says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.

Unlike smaller mortgages, many jumbo loans aren’t eligible to be purchased by the governmental-chartered agencies known as Fannie Mae and Freddie Mac, so they tend to be more expensive for borrowers. In most of the country, private-market financing is needed for loans exceeding $417,000; the cutoff points are higher in more expensive markets.

Demand for these loans has been driven in part by a surge in luxury home sales. Sales of $1 million-plus homes rose 19% in July from a year earlier, according to the National Association of Realtors.But private jumbo mortgages also have become more affordable than in the past. Rates on 30-year jumbos now average 4.22%, down from 4.82% a year ago and 5.27% two years ago, according to HSH.com, a website that tracks mortgage data. Those rates are currently about half a percentage point higher than those on regular mortgages; in 2008 and 2009, that spread was more than twice as wide.

For lenders, says Frank Donnelly, president of the Mortgage Bankers Association of Metropolitan Washington, the appeal of jumbo loans is clear: They are more profitable.

Despite the recent rate decreases, private jumbo mortgages still provide a bigger-than-usual spread between the interest banks receive and what they are paying on deposits.

Because they keep most of these loans on their own books, the lenders incur all the losses if a borrower defaults. Keith Gumbinger, a vice president at HSH.com, says lenders have been able to take on such risks because their balance sheets are in better shape and because they are subjecting borrowers to rigorous screening.

Borrowers typically need a 20% to 25% down payment on a private jumbo loan, and on mortgages over $1 million, that can jump to 30%, says Joel Berinson, president of Ultra Mortgage, a mortgage broker in Marlton, N.J. Still, Berinson says his firm has sold roughly 30% more in private jumbos so far this year than it had at this point last year.

The views, opinions, positions or strategies expressed by the authors and those providing comments or external internet links are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of First Capital, we make no representations as to accuracy, completeness, current, suitability, or validity of this information and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Any information provided does not constitute an offer or a solicitation to lend. Providing information to purchase does not guarantee a loan approval. All registered trademarks, copyright, images, or other items used are property of their respective owner and are used for editorial purposes only.

First Capital Mortgage is a subsidiary of PHH Home Loans LLC, a direct lender, Dept. of Corporations file #413-0713 NMLS#4256

Can you qualify for a mortgage to buy a home? It's a straightforward question, but often one without a simple answer. Here are some of the main considerations to answer that question for yourself.

Can you afford it?

This is the first, and biggest question. If you can't comfortably manage the monthly mortgage payments, there's no point in going any further. Notice we said comfortably -- if you have to stretch to fit a mortgage in your budget, buying a home isn't for you, at least not yet. At the very least, you might consider a less-expensive property that won't stretch your budget as far.

In evaluating a mortgage application, lenders look at two budget numbers. First, they'll usually want to see that your monthly mortgage payment won't exceed 28 percent of your gross monthly income. That includes the mortgage itself, along with taxes, homeowner's insurance, mortgage insurance and any other fees that are billed along with the mortgage. Your gross income is your income before taxes and other deductions.

On top of that, they want to see that your other monthly debt payments -- for car payments, credit cards, child support and any other long-term debt -- do not exceed 36 percent of your gross monthly income if you're applying for a standard mortgage.

These limits are for conventional mortgages. If you're thinking about an FHA or VA mortgage, total debt can go above 40 percent, and about 31 percent for the mortgage payment.

You also need to take into account the down payment, which typically ranges from 5 percent to 20 percent of the home purchase price. But before we talk about that, you first have to consider your credit score.

Credit score

Credit scores get a lot of attention, but many people worry about them too much. The fact is, only about one-third of U.S. consumers have a FICO credit score below 650, according to the company. Over half have scores over 700, generally considered the mark of good credit.

If you have at least three lines of credit -- credit cards, auto loans or any other kind of loan-based debt -- and have kept up with your payments, you're probably in good shape. You can even have missed a payment or two and still have decent credit, provided you didn't go more than 30 days past due.

If you've got a credit score of 700 or better, you should be able to qualify for a mortgage, provided you meet the other requirements. However, the lower your score, the higher interest rate you'll end up paying.

The best rates go to borrowers with scores of 740-760 and above. If you're around 720, expect to pay about a quarter-percent more; perhaps a half percentage point higher if you're at 700. You can still qualify for a mortgage with a credit score in the upper 600s, but be aware that interest rates increase fairly quickly once you get into that range.

To find out what your credit score is, order it from www.MyFICO.com. That's the legitimate source for FICO credit scores. Unlike your credit reports, which are available for free once a year from the major credit reporting agencies, you have to pay for your FICO score. You may find other services offering "free" scores, but those typically have hidden fees or offer non-FICO scores based on a different system. Some of these non-FICO scores are even offered by the credit reporting firms that provide FICO scores.

Down Payment

The traditional down payment is 20 percent. That's what lenders require to issue a mortgage without mortgage insurance, which typically boosts your effective interest rate by half a percent or more. Fannie Mae and Freddie Mac will issue mortgages with as little as 5 percent down, but most lenders are demanding at least 10 percent these days.

The minimum down payment you can make also depends on your credit score. If your credit score is 680 or lower, lenders are going to want at least 20 percent down on a conventional loan. If you're around 760 or better, you can probably put down the minimum they allow.

The minimum down payment a lender will allow is also going to be affected by where you are buying a home. Larger down payments will be needed in neighborhoods where prices are regarded as unstable, with the potential for falling. Lenders are more willing to accept smaller down payments in neighborhoods where home values are stable or rising.

Your down payment will also affect your interest rate. All other things being equal, the best interest rates go to borrowers who put down larger down payments; you'll pay a somewhat higher rate if you put down only 5 percent or 10 percent.

FHA, VA loan options

A couple other things. FHA mortgages still allow down payments of as little as 3.5 percent, although many lenders like to see borrowers put at least 5 percent down. The fees and mortgage insurance costs on FHA loans are higher than on conventional mortgages, which discourages some borrowers, although the interest rates tend to run a bit lower. Q

Finally, if you're a qualifying veteran or member of the armed forces, you may be able to qualify for a VA mortgage at 0 percent down, one of the few sources of no-money down mortgages that remain. No money down mortgages are also available on modest homes in rural or suburban areas through the USDA, but demand is high and there's often a waiting period for such loans.

Employment status

To qualify for a mortgage, the lender will want to see proof you've been working in the same field for the past two years. You can typically get this from your employer without much difficulty.

If you're self-employed, it's another story. You'll need to provide copies or, or access to, your actual tax returns. If your income varied, your ability to pay will be based on the lower of your last two years of income. Also, keep in mind that deductions for business expenses will lower your gross income for purposes of qualifying for a mortgage, so you may not be able to borrow as much as you'd hoped.

By Kirk Haverkamp

The views, opinions, positions or strategies expressed by the authors and those providing comments or external internet links are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of First Capital, we make no representations as to accuracy, completeness, current, suitability, or validity of this information and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Any information provided does not constitute an offer or a solicitation to lend. Providing information to purchase does not guarantee a loan approval. All registered trademarks, copyright, images, or other items used are property of their respective owner and are used for editorial purposes only.

First Capital Mortgage is a subsidiary of PHH Home Loans LLC, a direct lender, Dept. of Corporations file #413-0713 NMLS#4256

Are you a new homeowner looking for ways to save some money? Here are some great places to start.

When buying a new home, you probably have a "To Do"
checklist longer than a loan application. But there are a few things you
should put above "Do Happy Dance in Front of Co-workers who Rent."

Like "Find Ways to Save Money."

The good news is there are several ways you might be able to save a
little green. From major moves like refinancing your mortgage, to more
humble acts like bundling your Internet and cable with one company, the
savings potential for new or prospective homeowners is big.

So, before putting on your dancing shoes, check out these five tips that could help you save.

This means you could pay off your house in 15 years instead of 30
years. And that has some advantages, as well as some challenges.

On the plus side, a 15-year loan typically means a lower interest
rate, says Fred Arnold, a member of the National Association of Mortgage
Professionals (NAMB) board of directors. He says most lenders offer a
rate that’s at least a half percent lower than the rate for a 30-year loan. This means you could pay much less in interest over the life of
the loan.

How much? Here's one example:

If you borrowed $250,000 for 30 years at 4.5 percent, you would pay
$206,016.78 in interest over the life of the loan, in monthly payments
of $1,266.71. However, if you borrowed $250,000 at 4.0 percent for just
15 years, your monthly payments would rise to $1,849.22, but the total
amount of interest would only be $82,859.57. That’s a savings of more
than $120,000...a good chunk of change, wouldn’t you say?

As for challenges, because you are paying off the loan in half the
time, your monthly payment will be higher, as the example above shows.
So be sure you can afford it. And if you’re comfortable with it, Arnold
says you could be on a strong financial path.

"Your payments might be higher, but it requires you to be disciplined
and in many cases that’s how people become very wealthy," says Arnold,
who adds that if you can’t afford to go all the way down to a 15-year
loan, there are also 20- and 25-year options from some lenders.

If your down payment was less than 20 percent of the value of your
home, it’s very likely your lender required you to buy private mortgage
insurance (PMI), a policy that protects any losses the lender might take
if you don’t make your loan payments.

And unfortunately, the PMI isn’t cheap. According to a mortgage
consumer guide published by the U.S. Federal Reserve System, which
oversees national monetary policy and banks, PMI could cost anywhere
from $50 to $100 per month.

Wouldn’t it be nice to get rid of that? Good news: you can. The first
way, of course, is to put 20 percent down when you buy a house. But if
you couldn’t or can’t, don’t worry, you still have a shot at losing the
insurance.

According to the Federal Reserve, when you make enough payments to
gain 20 percent equity in your home (based on the original purchase
price), you can send a written request to your lender to cancel the PMI.

The Federal Reserve adds that federal law requires your PMI payments
to automatically stop once you reach 22 percent equity in your home -
again based on your original purchase price and with a clean payment
record.

Finally, you should know that PMI is different than LPMI, which
stands for lender's private mortgage insurance. Some lenders buy LPMI
and charge you a higher interest rate to cover the expense. According to
the Federal Reserve, this type of insurance does not automatically
cancel; instead, you must refinance your home to possibly get rid of it.

Tip #3 - Shop for the Best Home Insurance Rate

Buying a home is probably one of the biggest financial decisions
you'll ever make. This means you should take some time to not only get
the best rate on your home insurance policy, but also the best policy
for your lifestyle and home.

Keep in mind that this is the insurance that protects you against
financial loss from such things as theft, fire, flood, and other
liabilities on your property. So, it’s important to get the right
policy.

To do so, there are some key things to take note of.

To start, it’s important to purchase enough insurance in the event of
a total loss of your home, says the Insurance Information Institute
(III), which provides insurance information to the public, media, and
government regulatory agencies. In addition, they say, remember that
your home insurance also covers your possessions, so include them in
your estimate.

Then once you get that all squared away, you need to make sure you’re
getting the best rate possible. One way to do this, says the III, is to
take the highest deductible you feel comfortable with. The deductible
is the amount you pay out of pocket before your insurance kicks in.

For instance, the III says in their Home Buyers Insurance Checklist
that "Since most people only file a claim every eight to 10 years,
having a higher deductible saves money over time and preserves your
insurance for when it’s really needed."

Tip #4 - Consider a Home Contractor for Some Projects, But Not All

We know. Your new home is great...but you want to make it even
greater with some do-it-yourself (DIY) projects. After all, if you
provide the sweat, you'll save a lot of money, right?

Well, maybe. Unless you’re a builder yourself, you might be in for
sweat, tears, and a more expensive project. That’s why you may want to
consider hiring a contractor.

But what’s to fear about not hiring a professional and doing it yourself?

"The unknown," says Dean Herriges, president of the National
Association of the Remodeling Industry (NARI). "The unknown that is
obvious to a professional but is not to the average layperson can cause a
lot of problems for people trying to tackle a project themselves."

He says that often, the new homeowner will open up a wall and
inadvertently create a major electrical, plumbing, or structural
problem. Then, it’s going to cost even more than the original project to
get a professional to fix it.

He adds, however, that there are some projects that are well within
the skill set of a non-tradesman, including small roof repairs and paint
jobs. As for the rest, think long and hard before deciding to tackle it
yourself. Because really, wasn’t finding and buying the house stressful
enough?

Tip #5 - Consider Bundling Your Internet, Cable, and Phone

There's nothing like watching that first big game in your own home.
But before you call the cable company, there are a few things you should
know, especially if you plan to use the same company for two or more of
your digital services—also known as bundling. And if you do it right,
bundling could save you some money, says Consumer Reports Magazine
Senior Editor Jeff Blyskal.

First, he says to remember that the cable company saves money when
you bundle because they only need one cable to deliver your cable TV,
Internet, and home phone services. Bundling these three
services is typically called the "triple play," and it stands to reason
that you should pay less for that than if you ordered each service
individually. In fact, Blyskal says the savings could run from 40 to 60
percent, depending on your area and the amount of competition.

However, if you don’t need a home phone (the third part of the triple
play) and decline the service, don’t expect as big a discount on the
other two services. You should still enjoy some savings, though, says
Blyskal.

Unfortunately, though, this discount usually only applies for a
limited time, typically anywhere from six months to two years, he says.
So, bargain hard now for the longest term at the lowest rate; this is
when you have the power since they want your business.

The views,
opinions, positions or strategies expressed by the authors and those providing
comments or external internet links are theirs alone, and do not
necessarily reflect the views, opinions, positions or strategies of First
Capital, we make no representations as to accuracy, completeness, current,
suitability, or validity of this information and will not be liable for
any errors, omissions, or delays in this information or any losses, injuries,
or damages arising from its display or use. Any information
provided does not constitute an offer or a solicitation to lend. Providing
information to purchase does not guarantee a loan approval. All registered trademarks, copyright,
images, or other items used are property of their respective owner and are used
for editorial purposes only.

First
Capital Mortgage is a subsidiary of PHH Home Loans LLC, a direct lender, Dept.
of Corporations file #413-0713 NMLS#4256

Nevertheless, this is a trend that has
economists taking a closer look.

Freddie not only says fixed-mortgage rates
are up for the fourth straight week, the mortgage giant also says that the rate
of new single-family home construction is at a five-month low. That means less
new homes on the market, with higher rates on the ones that are available for
homebuyers.

Freddie Mac noted Census Bureau data showing
residential building permits moving up in July, although builders slowed the
pace of construction starts on one-family homes in July to the least since
March.

Apartment and condominium building picked
up to the most since April.

Existing home sales rose in July from
June's eight-month low and the median sales price jumped 9.4% from a year
earlier, representing the largest 12-month gain since January 2006. The price
gain was broad-based, with annual increases registered in all four regions of
the U.S. and led by a 24.5% increase in the Western U.S.

As Nothaft notes, bond yields
are up of late, with 10-year U.S. Treasury notes yielding 1.68% in the past
week, up from 1.5% at the beginning of August. While these rates are relatively
low in a historical sense, mortgage rates do track the direction of Treasury
rates, and right now, those rates are moving upward.

2.
Housing data has improved Freddie
Mac also notes that existing home sales are climbing, after months of soft sales
activity. In addition, the median home sales price has risen 9.4% from July 2011
to July 2012. In general, the healthier the housing market, the more interest
mortgage lenders charge for home loans.

3. A
quiet Eurozone For months,
economists (and some real estate agents) were wringing their hands over the
sovereign debt crisis in Europe. Financial
troubles in Greece, Italy, Portugal and other European countries sent tremors
across the globe, causing anxiety among financial markets, and among mortgage lenders, who feared a major global financial crisis. But in August, at least,
Eurozone debt has held less sway in media headlines and in the market, and the
relative quiet across the pond has been good for the global economy. In reverse, rising mortgage rates likely
had an economic impact. The Mortgage Bankers Association reports that U.S. mortgage applications fell by 7.4% for
the week ending August 17, 2012.

A decline in mortgage applications at a time
when mortgage rates are climbing may be a coincidence, but that's unlikely.
Historically, when homebuyers sense mortgage rates are higher (thus making homes
more expensive), they're less likely to try and land a mortgage. A one-month snapshot does not a housing
market make. But the last 30 days have seen a steady hike in mortgage rates.
If that continues in September, then it's a
trend, and could be a big one.By Brian O'Connell

The views,
opinions, positions or strategies expressed by the authors and those providing
comments or external internet links are theirs alone, and do not
necessarily reflect the views, opinions, positions or strategies of First
Capital, we make no representations as to accuracy, completeness, current,
suitability, or validity of this information and will not be liable for
any errors, omissions, or delays in this information or any losses, injuries,
or damages arising from its display or use. Any information
provided does not constitute an offer or a solicitation to lend. Providing
information to purchase does not guarantee a loan approval. All registered trademarks, copyright,
images, or other items used are property of their respective owner and are used
for editorial purposes only.

First
Capital Mortgage is a subsidiary of PHH Home Loans LLC, a direct lender, Dept.
of Corporations file #413-0713 NMLS#4256

Guy Asaro, president of McMillin Homes LLC, bought three land parcels in Texas this year
while coming up empty in the San Diego area, where the closely held builder is based.

Ready-to-build lots around San Antonio, where McMillin has constructed houses
since 2005, cost $55,000 to $70,000, or as little as one-sixth the going price
in San Diego, Asaro said. He keeps searching in California,
the most populous state, because a little land in the right place can yield a
big return.

“In Texas, land is like lumber -- something to build a house for somebody to
live in,” Asaro said in a telephone interview. “In California, the land is
what’s valuable. The house is just how you monetize it.”

The nascent recovery in new-home sales has U.S. builders
rushing to buy up a diminishing supply of well-located, ready- for-construction
land. They added more than 18,000 lots during their most recent quarter, the
biggest gain since their inventory hit a nadir in the fourth quarter of 2009,
according to data compiled by Bloomberg Industries. Demand is becoming so
overheated in areas such as coastal California that developers are forced to pay
more or shop in less-favorable markets.

Around the California coast, where the technology and health-care industries
are fueling job gains, plots are selling faster than developers can prepare the
dirt. The supply of finished lots -- which have permits, streets and water and
power lines, enabling construction -- will fall to zero within a year in San
Diego, Orange County and San Jose, said the Concord Group, a Newport Beach-based
consulting firm.

‘Running Out’

“We’re running out of inventory,” Richard Gollis, a Concord Group principal,
said by phone.

U.S. new-home sales rose in July to an annual pace of 372,000, up
25 percent from a year earlier and the fastest since April 2010, the Commerce
Department reported last week.

Land prices probably will climb an average of 5 percent this year and next,
faster than home values, according to Paul
Diggle, property economist for Capital Economics Ltd. in London.

“We expect the early stages of the recovery to be characterized by demand for
land that can be relatively easily developed and which is within a reasonable
commuting distance of downtowns,” Diggle said in an e-mail. “Speculative buying
of land in the desert, miles from business hubs, is unlikely to make a quick
reappearance.”

Job Growth

California payrolls increased by 25,200 positions in July, the most of any
state, the U.S. Bureau of Labor Statistics reported on Aug. 17. The unemployment rate in the 10 largest cities varied from a low
of 7.3 percent in the San Francisco- Silicon Valley area to a high of 14.7
percent in Fresno, in central California, according to the state Employment
Development Department. The statewide 10.7 percent jobless rate was
the third-highest in the U.S., behind Nevada and Rhode Island.

Lot shortages are also looming in and near Seattle; Raleigh, North Carolina;
and Washington, D.C., where job growth has outpaced the addition of home sites,
Gollis said.

In Phoenix, where 48,500 jobs were added in the 12 months through July,
prices for finished plots in desirable areas have tripled since 2010, said Nate
Nathan, a Scottsdale, Arizona- based land broker. He completed two deals in the
Phoenix area this month, totaling $54.5 million for 1,061 lots.

“This market is on fire,” he said in a interview.

Bubble Warning

Permit applications for new U.S. homes climbed last month to
an annual rate of 812,000, the most in almost four years, according to the
Commerce Department. While that’s up 30 percent from July 2011, housing
construction must reach an annual pace of about 1.2 million to accommodate population
growth, said Mark Kiesel, managing director for Pacific Investment
Management Co. in Newport Beach.

“New inventories are at 50-year lows,” he said during an Aug. 14
interview on Bloomberg Television. “Housing starts are really half of what the
long-term average is.”

Kiesel became a homeowner again in May, six years after he sold his last
house and said that over-construction and easy credit had created a housing
bubble.

Robert
Shiller, a Yale University professor of economics who also forecast the
property crash, said this month that real estate is still prone to busts.

“California is the worst,” Shiller said during an appearance with Kiesel on
Bloomberg Television’s “Street Smart.” “There are the repetitions of the bubble
psychology. It could be building up in some places.”

Inland Markets

In the San Francisco Bay area, the median home price jumped 13 percent in
July from a year earlier to the highest level in almost four years, according to
DataQuick. The increase was 8.1 percent in Southern
California, the San Diego-based information company said.

While the coast recovers, California’s inland real estate markets remain
among the weakest in the country. The five U.S. metro areas with the highest
rates of foreclosure filings in the first half of the year were
Stockton, Modesto, Riverside-San Bernardino, Vallejo and Merced, all inland
California cities, according to RealtyTrac Inc.

Vallejo filed for bankruptcy in 2008, followed by Stockton and the city of
San Bernardino this year, after declining property values and rising
public-employee costs left them insolvent.

Even some inland areas are starting to experience rising demand for lots,
said Layne Marceau, Northern California division president for closely held
builder Shea Homes LP. Shea manages development of Mountain House, a planned
community for 15,000 homes 58 miles (93 kilometers) east of San Francisco. The
California Public Employees’ Retirement System wrote down its
$1.12 billion investment in the project to $96.8 million as land values plunged,
according to the fund’s 2011 annual report.

‘Future Inflation’

This month, builders agreed to buy almost 300 finished lots in Mountain
House, at prices 50 percent higher than a year ago, Marceau said.

“They’re paying today for projected forecasted future inflation,” he said in
an interview. “It’s been amazing.”

In San Diego, well-capitalized public builders such as Lennar
Corp. (LEN) are driving up land prices beyond the reach of smaller
competitors, said Bill Davidson, president of Davidson Communities, a closely
held builder based in Del Mar, California. Lennar recently outbid him for a
10-lot parcel near San Diego, a property so small that large builders would have
ignored it a few years ago, he said.

“They’re here with a vengeance,” Davidson, whose company has built 5,000
homes since 1978, said in a phone interview. “I’ve seen land prices go up 50
percent.”

Lennar, Toll

Lennar, the third-largest U.S. homebuilder by revenue, spent $287 million on
land and lots in its most recent quarter, a 74 percent increase from a year
earlier, according to President Richard Beckwitt.

“We continued to acquire great deals in Florida and Texas, but invested more
heavily in some extremely high-margin opportunities in California and the
Mid-Atlantic,” Beckwitt said on Lennar’s June 27 earnings conference call.

Lennar declined to comment further, said Allison Bober, a spokeswoman for the
Miami-based builder.

Toll Brothers Inc.
(TOL), the largest U.S. luxury-home builder, agreed in May to pay about $110
million for half of an Orange County subdivision with permits to build 1,780
single-family homes and 414 apartments. The Horsham, Pennsylvania-based company
is raising prices for its California homes because demand is so strong, Chief
Executive Officer Douglas Yearley Jr. said on an Aug. 22 earnings conference
call.

“Silicon Valley: hot,” Yearley said as he ranked California’s markets. “We
just wish we had more. San Francisco: strong. Coastal Southern California,
Orange County and northern San Diego County: very strong.”

Higher Risk

Publicly traded builders recorded more than $32 billion in losses on land
purchases and options contracts from 2005 through the first quarter of this
year, and should restrain from depleting their cash to buy land “in these still
uncertain times,” according to a July report by Fitch
Ratings.

California, among the states hit hardest by the housing crash, offers a
high-risk path to profits compared with Texas, where home prices have
moved in a narrower range, said Brad
Hunter, chief economist for Houston-based Metrostudy, which tracks new
construction.

Land in Texas -- the second-most populous state, which has a quicker
development approval process -- offers steady returns while it “isn’t
particularly sexy or exciting,” Hunter said in a phone interview from his office
in Palm Gardens, Florida. “People in California have to bite their fingernails
and stomach the risk that there won’t be another wave of foreclosures.”

‘Big Dollars’

D.R. Horton Inc.
(DHI), the largest builder by volume, spent $938 million on land in the
first three quarters of its fiscal year, up from $582 million a year earlier.
While recent deals boosted the Fort Worth, Texas-based builder’s nationwide lot
count to more than 130,000, the most since mid-2008, little of the new land was
in California because prices seemed “overheated,” CEO Donald
Tomnitz said.

“It takes big dollars and it’s a higher risk, given the state of California’s
economy,” Tomnitz said on a July 27 earnings call. “So we’re trying to choose
land and lot positions in low-risk areas to provide us the best return.”

Approval Process

Developers preparing California land for construction face an approval
process that delays projects and pushes up costs. Newhall Ranch, a
master-planned community north of Los Angeles, received initial county approval
in 1998 for 20,000 homes. Its developer, Aliso Viejo,
California-based FivePoint Communities Inc., doesn’t expect to break ground
until next year, after delays caused by litigation and a 2009 financial
restructuring, CEO Emile Haddad said.

“The barriers to entry are so lengthy and complicated, it makes the supply
limited,” Haddad said in phone interview. “Unless you’re working on deals and
entitlements today, you’re going to miss the next cycle.”

Builders are required to foot the bill for infrastructure development,
further driving up land costs. FivePoint is in talks to pay $1.2 billion for
parkland, roadways and schools for the right to construct as many as 10,700
homes at the former El Toro Marine Corps Air Station in Orange County.

Environmental regulations, such as requiring developers to report the
potential impact of greenhouse gases generated from new projects, discourage
investors with limited time to get a return on their money, said Bob McLeod, CEO
of Newland Co., a planned-community developer based in San Diego.

‘Expensive Place’

California’s “not expensive because everybody’s running to buy land, but
because it’s an expensive place to do business by a wide margin,” he said. “It
takes three to five to 10 years to get a project approved.”

Lots at Newland’s Cinco Ranch, a 12,000-home master-planned community outside
Houston, cost about $65,000, compared with more than $338,000 for similar
properties at the company’s 4S Ranch north of San Diego, McLeod said.

Builders pay a premium for California land with the expectation of wider
profit margins, Asaro of McMillin said. His company, which sold 456 homes last
year, lists a 2,800-square- foot (260-square-meter) house in San Diego for
$459,900, compared with $246,900 for a similar property in Texas.

KB Home (KBH) sold its
average California house for $402,000 in its most recent quarter, a 32 percent
jump from a year earlier. That compared with an average of $163,700 for homes in
its central region of Texas and Colorado, where prices dropped 7.7 percent, the
Los Angeles-based builder said.

Those price differences will increase as California lots become more scarce,
Asaro said.

“I see immense price pressure here in the next couple years,” said Asaro,
this year’s chairman of the Building Industry Association of San Diego. “It’s
going to be very hard to meet the upcoming demand. The future of homebuilding is
where people are and people are where jobs are.”

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